Democratic Changes and Economic Growth

Abstract

Today it must be admitted that there is no significant connection between the level of development of democratic institutes and the value of economic growth. This conclusion invariably stems from the vast amount of theoretical and empirical studies that have been conducted over the last 50 years. Why have developed democracies become economic leaders? Why is the US economy growing faster than the economy in Angola, but slower than the economy in Botswana? There are still no answers to these seemingly simple questions. In this paper the author attempts to theoretically justify and empirically confirm the link between the democratic changes in countries and their economic growth. This link becomes apparent if we assume that the amount of transaction costs of exchange depends on the level of political and economic freedom. In turn, transaction costs have a significant influence on the effective functioning of the economy. A decrease in costs of exchange speeds up economic growth and an increase in costs slows down growth. This kind of approach enables us to explain the economic successes of democracies, the lagging behind of many countries in Asia and Africa, the historical reasons for the beginning of the industrial revolution in Europe, the speeding up of economic growth in the 18^th-19^th centuries, the rapid development of production in China and many other occurrences.